IP Update, Vol. 22, No. 2

Secret Sales Still Qualify as Prior Art Under AIA

Addressing whether the on-sale bar of America Invents Act (AIA) 35 USC § 102(a)(1) applies to confidential sales where specific details are not made public, the Supreme Court of the United States found that the post-AIA provision operates the same as it did pre-AIA—namely, the sale or details of the sale do not need to be publicly available in order to create a bar to patentability. Helsinn Healthcare S.A. v Teva Pharmaceuticals, USA, Inc., Case No. 17-1229 (Sup. Ct. Jan. 22, 2019) (Thomas, Justice).

Helsinn developed Aloxi, a drug that treats chemotherapy-induced vomiting and nausea, and which contains the active ingredient palonosetron. Helsinn entered into a licensing and a supply and purchase agreement with MGI Pharma to distribute, promote, market and sell 0.25 mg and 0.75 mg doses of palonosetron in the United States. The purchase agreement included a confidentiality clause with regard to any proprietary information that might be revealed. The dosage formulations in the agreement were not released to the public, although there was a joint press release about the agreement in general, and the Form 8-K filing at the US Securities and Exchange Commission was accompanied by redacted copies of the agreements. In January 2003, almost two years after entering into the agreement with MGI Pharma, Helsinn filed a provisional patent application for 0.25 mg and 0.75 mg treatment doses of palonosetron. This provisional application ultimately led to four issued patents, the most recent of which was at issue in the case. It was filed post-AIA in May 2013 and claimed a 0.25 mg dose of palonosetron in a 5 mL solution.

The litigation started after Teva sought approval from the US Food and Drug Administration in 2011 to market a generic 0.25 mg palonosetron product. Helsinn sued Teva for patent infringement of issued patents, including the post-AIA-filed patent. Teva argued that the patent was invalid under the on-sale bar of 35 USC § 102(a)(1). The district court ruled in favor of Helsinn, finding that the sale to MGI Pharma did not create an on-sale bar under § 102(a)(1) because there was no public disclosure of the details of the agreement, such as the fact that it involved the 0.25 mg dose. The Federal Circuit reversed, explaining that the public disclosure of the sale itself was sufficient to meet the on-sale bar (IP Update, Vol. 21, No. 7). Helsinn appealed to the Supreme Court.

The Supreme Court addressed the question of whether, under the AIA, an inventor’s sale of an invention to a third party that is obligated to keep the invention confidential qualifies as prior art for purposes of determining the patentability of the invention. In a unanimous decision authored by Justice Clarence Thomas, the Supreme Court concluded that such a sale qualifies as prior art.

The pre-AIA version of § 102(b) stated: “A person shall be entitled to a patent unless . . . (b) the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country, more than one year prior to the date of the application for patent in the United States.” Under the AIA version of the on-sale bar, § 102(a)(1) states that “[a] person shall be entitled to a patent unless . . . the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.”

The Supreme Court noted that its decisions prior to the AIA suggested that a sale or offer for sale did not need to be available to the public. The Supreme Court also noted that the US Court of Appeals for the Federal Circuit had issued pre-AIA decisions finding that “secret sales” can still trigger the on-sale bar. Helsinn argued that these prior decisions were inapplicable to the AIA version of the bar, § 102(a)(1), because the addition of the language “or otherwise available to the public” limits the “on-sale” bar to sales that make an invention available to the public, but the Supreme Court disagreed. It found that the term “on sale” was used in the pre-AIA as well as the AIA statute, and when Congress adopts similar language, it “must be considered to have adopted also the construction given by this Court to such language.” The Supreme Court, therefore, decided that the additional language in the AIA version of § 102(a)(1) did not alter the meaning of the on-sale bar, and that confidential sales are thus a bar to patentability.

Practice Note: Companies should be careful not to enter licensing, royalty, or supply and purchase agreements prior to filing of any patent applications.

Diagnostic Method Found Ineligible, Again

In a post-Mayo v. Prometheus opinion addressing the subject matter eligibility of diagnostic methods based on underlying natural laws, the US Court of Appeals for the Federal Circuit affirmed the district court’s conclusion that the claims at issue were invalid as ineligible, notwithstanding  the Federal Circuit’s acknowledgement of the claims’ recitation of “certain concrete steps.” Athena Diagnostics, Inc. v. Mayo Collaborative Servs., LLC, Case No. 17-2508 (Fed. Cir. Feb. 6, 2019) (Lourie, J) (Newman, J, dissenting).

Athena is the exclusive licensee of a patent covering methods of diagnosing neurological disorders by detecting autoantibodies to a protein called muscle-specific tyrosine kinase (MuSK). Athena sued Mayo alleging infringement of the patent, and Mayo moved to dismiss, arguing that the asserted claims were invalid under 35 USC § 101. The district court granted Mayo’s motion, concluding that the asserted claims were invalid as directed to ineligible subject matter. More specifically, the district court found that the asserted claims were directed to a natural law and failed to recite an inventive concept. Athena appealed.

At the Federal Circuit, Athena argued that the claims were not directed to a natural law because they recited innovative, specific and concrete steps, but the Federal Circuit disagreed. The Court began by identifying the natural law as the correlation between the presence of naturally occurring MuSK autoantibodies and MuSK-related neurological diseases.

Proceeding to step one of the Alice inquiry, the Federal Circuit found the claims to be directed to an ineligible concept. While the Court conceded that the claims included certain concrete steps to observe the operation of the natural law, it determined that the claims as a whole were directed to the abstract idea, “because the claimed advance was only in the discovery of a natural law, and . . . the additional recited steps only apply conventional techniques to detect that natural law.” Moreover, the Court noted that the specification described the concrete steps as conventional.

Athena further argued that the claims required labeling with a human-made molecule, but the Federal Circuit reaffirmed that the use of a human-made molecule as part of conventional techniques to detect or observe a natural law may still leave the claim directed to the natural law. The Court distinguished the case at hand from its decision in Vanda (IP Update, Vol. 21, No. 5) on the basis that Vanda claimed a new treatment for an ailment using a natural law rather than the natural law itself.

At step two of the Alice inquiry, the Federal Circuit found that the claims did not include additional elements transforming the nature of the claim into a patent-eligible application, because the claims only required standard techniques applied in a conventional manner. The Court contrasted the claims at hand with those at issue in which required multiple freeze-thaw cycles, an unconventional step. Athena argued that the claimed steps were unconventional because, prior to Athena’s discovery of the correlation between the MuSK autoantibodies and the MuSK-related disease, the steps had not been applied to detect the MuSK autoantibodies. However, the Court explained that an unconventional concept at step two cannot be furnished by the unpatentable natural law itself—it must represent an inventive application beyond that discovery.

In dissent, Judge Newman stated that, in her view, the claims were directed to a multi-step method of diagnosis, not a law of nature. In Newman’s view, the majority erred in dissecting the claim into old and new elements and then removing the old elements from the claims for the purpose of the § 101 analysis.

According to Newman, under the proper procedural framework, where claims are considered as an ordered combination, the claimed method determines whether the correlation is present as part of a larger diagnostic method, but does not claim the concept of the correlation itself. Considering the claim as a whole, Newman would have found the claims subject matter eligible as directed to a method of diagnosing the MuSK-related disease using a human-made chemical-biochemical procedure, not a law of nature.

Turning to a policy issue, Newman argued that the public interest is poorly served by creating disincentives to the development of new diagnostic methods, a sentiment echoed in the majority opinion. As Newman observed, by their nature diagnostic methods are tightly bound to underlying natural laws and are hence especially susceptible to challenges based on subject matter eligibility.

Practice Note: In accordance with the distinction Judge Lourie made between the case at hand and Vanda, claims to methods of treatment may have a higher chance of withstanding scrutiny relative to diagnostic methods. In Vanda, the Federal Circuit concluded that a method of treatment by administering a drug at certain dosage ranges based on a patient’s genotype was not directed to a natural law.

If It Ain’t Broke: Motivation to Modify Compound Must Consider All Its Characteristics

Affirming a Patent Trial and Appeal Board (PTAB) decision finding claims directed to an epilepsy drug patentable, the US Court of Appeals for the Federal Circuit found that a skilled artisan would not have been motivated to modify a prior art compound when the modification would improve some characteristics of the compound but worsen others. Mylan Pharm. Inc. et al. v. Research Corp. Techs., Inc., Case Nos. 17-2088, -2089, -2091 (Fed. Cir. Feb. 1, 2019) (Lourie, J).

Research Corporation Technologies (RCT) owns a patent that discloses and claims enantiomeric compounds and pharmaceutical compositions useful in the treatment of epilepsy and other central nervous system disorders. Argentum Pharmaceuticals petitioned for inter partes review (IPR) of RCT’s patent based on a combination of references. Mylan Pharmaceuticals, Breckenridge Pharmaceutical and Alembic Pharmaceuticals subsequently filed their own petitions and moved to join the IPR proceedings filed by Argentum, which the PTAB allowed.

During the PTAB proceeding, the petitioners argued that there was a motivation to modify the lead compound in one of the references to improve the compound’s stability. The petitioners acknowledged, however, that the modified compound would have slightly degraded potency compared to the unmodified compound. RCT responded by stating that there was no evidence that the unmodified compound was unstable, and that a person of ordinary skill would consider all of a compound’s characteristics—such as an acceptable level of stability of the unmodified compound and degraded potency of the modified compound—together before making any modification. The PTAB agreed with RCT, finding the claims patentable because the petitioners failed to establish that a person of ordinary skill in the art would have been motivated to modify a lead compound based on the teaching of a second prior art reference. The joined petitioners appealed.

RCT argued that Mylan, Breckenridge and Alembic did not have standing to appeal since Argentum, the party that filed and argued the IPR, was not appealing, and because the joined parties were limited to an “understudy” role during the IPR proceedings. Specifically, RCT argued that the joined parties were limited to an understudy role because they were joined more than one year after an infringement action was brought against them. RCT argued that allowing the joined parties to appeal the IPR decision would be an end run around the one-year statutory time limit of 35 USC § 315 for filing an IPR.

The Federal Circuit disagreed, finding that Mylan, Breckenridge and Alembic were properly joined as “parties” in the IPR under § 315 and therefore were qualified to appeal the IPR decision as “any party” under § 319. To find otherwise, the Court stated, would require reading the word “party” differently between §§ 315 and 319.

Turning to the non-obviousness finding, the Federal Circuit concluded that the PTAB’s decision was supported by substantial evidence, and found that there was no evidence that the unmodified lead compound had an unacceptable level of stability. The Court further found that even if a person of ordinary skill would have been motivated to modify the lead compound to improve stability, the degraded potency of the modified compound would have reasoned against any such modification. The Court therefore found that a person of ordinary skill would not have been motivated to modify a compound to improve a characteristic that was not a problem in a manner that would also degrade another characteristic of the compound.

No Motivation to Combine Necessary Where Secondary Reference Only Explains Primary Reference

The US Court of Appeals for the Federal Circuit upheld a Patent Trial and Appeal Board (PTAB) finding of obviousness over a patent owner’s challenge to the “combination” of prior art, explaining that no motivation to combine need be shown where a secondary reference is simply used to explain how a person of ordinary skill would have interpreted a primary reference. Realtime Data, LLC v. Iancu, Case No. 18-1154 (Fed. Cir. Jan. 10, 2019) (Stoll, J).

Hewlett Packard (HP) was granted inter partes review of a patent owned by Realtime Data covering a method for lossless data compression and decompression using a system known as dictionary-based encoding. HP argued that a previously issued patent (O’Brien) disclosed all claim elements of Realtime’s patent. However, O’Brien did not explicitly use the term “dictionary-based encoding,” which appeared in the claims of Realtime’s patent. Instead, O’Brien used the equivalent term “string encoding.” HP used a 1992 data compression textbook (Nelson) to show that a person of ordinary skill in the art would have recognized that O’Brien’s “string encoding” was the same thing as “dictionary-based encoding.” The PTAB found that the challenged claims would have been obvious over O’Brien either alone or in further view of Nelson. Realtime appealed.

Realtime argued that the PTAB erred in its determination that a person of ordinary skill would have been motivated to combine the teachings of O’Brien and Nelson.

The Federal Circuit found that the PTAB did not err in its motivation-to-combine analysis, stating that “the Board was not required to make any finding regarding a motivation to combine given its reliance on [one] reference alone,” because the Nelson reference was not used to show any particular element or teaching of the prior art. Rather, all of the claimed elements were disclosed by O’Brien, and the PTAB merely used Nelson to explain that a person of ordinary skill in the art would have understood O’Brien’s string encoding to be the same as the claimed dictionary-based encoding. The Court noted that the PTAB may have even used O’Brien as anticipatory prior art in this situation, but the Court’s choice not to do so did not preclude O’Brien’s use as an obviousness reference, since “a disclosure that anticipates under § 102 also renders the claim invalid under § 103, for anticipation is the epitome of obviousness.”

Practice Note: No motivation to combine is required when a first reference discloses each element of the claims and a second reference is used solely to explain some aspect of the first reference—as opposed to use of the second reference to show an additional element or teaching.

William C. Rose, an intellectual property litigation law clerk based in the Washington, DC office, also contributed to this article.

No Parking: Source of Anticipating Disclosure Determines If It’s “of Another”

In a combined opinion, the US Court of Appeals for the Federal Circuit addressed appeals from district court grants of summary judgment over two patents, and an appeal from the Patent Trial and Appeal Board (PTAB) that one of the patents’ claims were not shown to be unpatentable as anticipated under 35 USC § 102(e). Duncan Parking Techs., Inc. v. IPS Grp., Inc., Case Nos. 18-1205, -1360 (Fed. Cir. Jan. 31, 2019) (Lourie, J).

IPS designs parking meter technology and owns a patent directed to a credit-card-enabled, solar-powered, single-space parking meter than can be used to retrofit existing parking meters, and a later-filed patent directed to a credit-card-enabled solar-powered, single-space parking meter. The earlier-filed patent named King and Schwarz as inventors, and the later-filed patent named King, Hunter, Hall and Jones as inventors.

IPS filed a complaint against Duncan Parking Technologies (DPT) asserting infringement of both patents. The district court granted DPT’s motion for summary judgment that the accused product did not infringe certain claims of the asserted patents. Specifically, the court found that the accused product did not infringe the claims of the later-filed patent because the accused product’s cover panel, which the court construed to mean “upper structural component of the exterior casing,” did not include a plurality of buttons as required by the claims, since the accused product’s buttons were part of the parking meter itself and protruded through an opening in the casing. The district court also found that the accused product did not infringe the earlier-filed patent because the accused product’s keypad extended through an opening in the lower portion of the housing, and as a result, the lower portion of the accused product was not receivable within its housing base as required by the claims.

Shortly after IPS filed its complaint, DPT filed a petition for inter partes review arguing that the earlier-filed patent anticipated the later-filed patent under 35 USC 102(e). Instead of disputing the merits of the anticipation argument, IPS argued that the anticipating portions of the earlier-filed patent were solely attributable to King and were therefore not the disclosure “of another” under § 102(e), and thus could not be applied as prior art against the claims of the later-filed patent. DPT argued that the earlier-filed disclosure was prior art because Schwarz conceived at least a portion of the anticipating disclosure. The PTAB ultimately found that King was the sole inventor of the anticipating disclosure of the earlier-filed patent, and concluded that the challenged claims of the later-filed patent were not anticipated by the earlier-filed patent disclosure since DPT’s anticipation argument relied solely on portions that were the work of King alone. DPT appealed the PTAB’s patentability finding, and IPS appealed the district court’s non-infringement finding.

The Federal Circuit reversed the PTAB’s patentability decision. The Court explained that to be a joint inventor, one must (1) contribute in some significant manner to the conception or reduction to practice of the invention; (2) make a contribution to the claimed invention that is not insignificant in quality, when that contribution is measured against the dimension of the full invention; and (3) do more than merely explain to the real inventors well-known concepts and/or the current state of the art. The Court found that the evidence clearly demonstrated that Schwarz conceived much of the disclosure of the earlier-filed patent’s electrical system, including “how the various electrical components of the meter are interconnected and operate together.” Therefore, the earlier-filed patent’s anticipating disclosure was “by another,” and the later-filed patent was unpatentable under § 102(e)(2).

Turning to the district court’s summary judgment finding, the Federal Circuit affirmed the non-infringement ruling relating to the later-filed patent, explaining that the claims of that patent fundamentally distinguished the housing from the device and that the accused product did not infringe either literally or under the doctrine of equivalents. The Court however reversed the district court’s decision relating to the earlier-filed patent, finding that the district court erred in construing the term “receivable within” because it was contrary to the plain and ordinary meaning of the term and further excluded the preferred embodiment. The Court therefore vacated the summary judgment decision for the earlier-filed patent and remanded the case to the district court for further proceedings.

“Equal to” Means “Not Exceed” when Determining Patent Term Adjustment

The US Court of Appeals for the Federal Circuit found that the US Patent and Trademark Office (PTO) erred in calculating a patent term adjustment (PTA) for a patent covering an oral osmotic form of an antihypertensive drug, stating that the PTO failed to properly consider whether the applicant reasonably engaged in efforts to conclude prosecution. Supernus Pharmaceuticals, Inc. v. Iancu, Case No. 17-1357 (Fed. Cir. Jan. 23, 2019) (Reyna, J).

Supernus Pharmaceuticals filed a US patent application and an international application under the Patent Cooperation Treaty. The international application ultimately resulted in a European patent (EP). In the US case, a final office action issued on August 20, 2010, and Supernus filed a reply with a request for continued examination (RCE) on February 22, 2011.

On August 21, 2012, the European Patent Office notified Supernus that Sandoz had filed an opposition against the EP. Documents related to the opposition were forwarded to Supernus on September 11, 2012, and Supernus submitted the documents to the PTO on November 29, 2012. On September 10, 2013, the PTO entered Sandoz’s opposition and issued a first office action against the RCE. The US application issued on June 10, 2014, and reflected a PTA of 1,260 days beyond the 20-year patent term.

In calculating the PTA, the PTO assessed 886 days of applicant delay, of which 646 days were attributed to the time between the filing of the RCE and the information disclosure statememt (IDS). Supernus requested reconsideration, asserting that the period between the RCE and the European Patent Office notice (546 days) could not have been attributed as its delay. The PTO rejected reconsideration, and Supernus appealed to the US district court. On appeal, the district court granted summary judgment in favor of the PTO, finding that the calculation was not erroneous and that the Federal Circuit’s 2015 decision in Gilead Sciences, Inc. v. Lee foreclosed Supernus’s argument that 37 CFR § 1.704(c)(8), which governs patent term adjustment based on the filing of a supplemental reply, is arbitrary, capricious and otherwise contrary to the PTA statute, as a matter of law. Supernus appealed to the Federal Circuit.

The Federal Circuit reversed, explaining that Gilead was not controlling as it involved different facts and a different legal question. Unlike Gilead, “there were no efforts in which [Supernus] could have engaged to conclude prosecution” of the RCE because the European opposition was not in existence during the entire period of the calculated delay.

Turning to the PTO’s interpretation of the PTA statute, the Court declined to give Chevron deference to the PTO, finding that the plain terms of 35 USC § 154(b)(2)(C)(i) directly addressed the question of whether the PTO may reduce PTA by a period that exceeds the time during which Supernus failed to engage in reasonable efforts to conclude prosecution. The Court found that the two limitations imposed by the statute were that (1) the delays attributable to Supernus must “be equal” to the time period in which it failed to reasonably engage in efforts to prosecute, and (2) the PTA reduction must be tied to the time period “during which” it failed to reasonably engage in prosecution. The Court found that the PTA reduction by the PTO was inconsistent with the plain meaning of the statute, and reversed and remanded the district court’s summary judgment order.

Federal Circuit Signals Deference to Inventors in Determining Readiness for Patenting, Experimental Use

Addressing pre-America Invents Act (AIA) 35 USC § 102(b), the US Court of Appeals for the Federal Circuit held that the public-use and on-sale bars did not apply to the claimed surgical method because pre-critical-date surgeries employing the method were experimental uses during which the method was not ready for patenting. Barry v. Medtronic, Inc., Case No. 17-2463 (Fed. Cir. Jan. 24, 2019) (Taranto, J) (Prost, CJ, dissenting in part).

In July 2003, Barry developed a surgical method for ameliorating spinal column deviation conditions. Barry used the method in three surgeries on August 4, August 5 and October 14, 2003, respectively, but in each instance, the patients were unaware that Barry used the method, and Barry charged standard rates. Each of the patients had follow-up visits, including a three-month follow-up to determine if the surgery had successfully ameliorated the curvature conditions. The three-month visit for the October patient occurred in January 2004. Barry testified that he only felt confident that his invention functioned for its intended purpose after that January 2004 visit. He submitted a publication by February 1, 2004, and he filed a patent application on December 30, 2004, making December 30, 2003, the critical date for purposes of the statutory bars of pre-AIA 35 USC § 102(b).

Barry subsequently sued Medtronic for patent infringement. At trial, the jury found the patents not invalid, and the district court rejected Medtronic’s post-trial judgment as a matter of law motion that the patents were invalid under the public-use and on-sale bars based on Barry’s August and October 2003 surgeries employing the patented method. Medtronic appealed.

The Federal Circuit held that public-use and on-sale bars were not triggered because the invention was not ready for patenting before the critical date, and the only public use before the critical date was experimental use. Regarding readiness for patenting, the Court held that substantial evidence supported a finding that the claimed method was not known to work for its intended purpose until the January 2004 date, finding that the final follow-up from the October 2003 surgery was reasonably necessary to determine that the invention worked for its intended purpose. The Court further held that substantial evidence supported a finding of experimental use where non-inventors in the operating room could have been found to have an implied duty of confidentiality and the patients were unaware of the method, despite the fact that Barry charged for the surgeries. A key distinction was that, unlike a surgical implant, which is surrendered to the patient upon implantation, a surgical method is not surrendered to an unaware patient.

Chief Judge Prost dissented in part, nothing that she would have held the patent invalid. She argued that readiness for patenting does not require proof that the method would operate for its intended purpose. She also took a narrower view of the intended purpose of the invention based on the specification’s description of the claimed method’s advantages. Finally, she disagreed with the majority’s application of the experimental-use doctrine both procedurally and on the merits.

Practice Note: The Federal Circuit has signaled that it will be deferential to an inventor’s good-faith conception, corroborated by contemporaneous evidence, of how much testing is required to show that an invention will work for its intended purpose. Practitioners in close cases should carefully consider how the “intended purpose” should be defined in characterizing pre-critical-date uses as either “experimental” or “commercial.”

The Wild, Wild WesternGeco: Reasonable Royalties and Lost Profits

Following remand from the Supreme Court of the United States, the US Court of Appeals for the Federal Circuit addressed the impact of an intervening invalidation of four of six patent claims in issue by the Patent Trial and Appeal Board (PTAB) on the measure of a fully paid reasonable royalty and on the award of lost profits. WesternGeco LLC v. ION Geophysical Corp., Case Nos. 13-1527, 14-1211, -1526, -1528 (Fed. Cir. Jan. 11, 2019) (Dyk, J).

This litigation originated when WesternGeco sued ION Geophysical for infringement of six claims spanning three patents directed toward marine seismic surveys for discovering oil and gas deposits beneath the ocean floor. At the original trial, ION was found to infringe the claims under 35 USC § 271(f)(1) and (2), and the court awarded WesternGeco $12.5 million in reasonable royalties and $93.4 million in lost profits. The Federal Circuit initially reversed the lost profits award based on unauthorized extraterritorial application of the patent laws. After the Supreme Court heard the case (IP Update, Vol. 21, No.1), it instructed the Federal Circuit to reevaluate its decision in light of Halo Electronics (IP Update, Vol. 20, No. 6). The Federal Circuit again reversed the lost profits award, but remanded to the district court on the issue of enhanced damages, for which the district court eventually awarded $5 million.

At this point, the parties stipulated to the reasonable royalty amount (which ION paid) and agreed not to appeal the enhanced damages award, but did nothing to stipulate on the issue of lost profits. WesternGeco again petitioned the Supreme Court on the issue of lost profits, and the Supreme Court again granted certiorari on the lost profits issue.

In June 2018, the Supreme Court determined that the $93 million in lost profits awarded to WesternGeco for infringement under § 271(f)(2) was a permissible domestic application of § 284. The Supreme Court referenced the Federal Circuit’s prohibition of lost profits for non-US activities and again remanded the case to the Federal Circuit. Meanwhile, parallel proceedings before the PTAB resulted in a finding that four of the six asserted patent claims were invalid, and that only one of the two surviving claims could support WesternGeco’s lost profits claim.

In the present appeal, based on the PTAB’s invalidation of four of the six asserted claims, ION challenged both the fully paid and satisfied reasonable royalty award and the lost profits award.

ION argued that the calculation of the reasonable royalty should be affected by the PTAB’s invalidation of four of the asserted claims, and sought a new damages trial. ION cited Fresenius USA, Inc. v. Baxter Int’l. as authority for the proposition that a judgment cannot be final for purposes of intervening patent invalidations if any part of the litigation remains pending, i.e., the lost profits issue in this case. The Federal Circuit disagreed, noting that Fresenius does not allow reopening of a satisfied and unappealable final judgment. The Court went on to note that the compromise agreement resolving all issues outside of the lost profits appeal made it impossible for ION to reopen the agreed and fully paid unappealable final judgment on the reasonable royalty.

With respect to the lost profits award, ION argued two main points. First, it argued that the district court erred as a matter of law in rejecting the theory that WesternGeco was not entitled to lost profits because ION was not a direct competitor of WesternGeco—an argument the Federal Circuit quickly dismissed. The Federal Circuit noted that both companies performed similar functions in terms of ocean floor surveys and that sufficient evidence existed in the record to support the jury’s finding on direct competition.

Second, ION argued that lost profits cannot be sustained in light of the PTAB’s invalidation of all but one of the claims that supported the initial lost profits award. The Federal Circuit noted that the jury found all of the asserted claims infringed and made a single lost profits award, but the jury instructions and verdict form did not instruct the jury to award damages based separately on infringement of each of the asserted claims. The Court noted that WesternGeco did not cite to any specific testimony that infringement of the only surviving claim supporting the lost profits award was necessary to perform the 10 surveys that WesternGeco had contended it lost to ION. The Court concluded that in order to sustain the lost profits award, the record must establish that there was no dispute that the technology covered by the sole remaining claim, independent of the technology covered by the invalidated claims, was required to perform the 10 surveys at issue.

Explaining that the district court was better positioned to decide this factual inquiry, the Federal Circuit remanded the case to determine whether a new trial on lost profits was required, stating that “[t]he district court may deny a new trial on lost profits if, but only if, it concludes that WesternGeco established at trial with undisputed evidence that [the surviving claim] covers technology necessary to perform the surveys upon which the lost profits award is based.”

Practice Note:  On February 19, 2019, the Supreme Court of the US declined cert on a petition by WesternGeco to rule on the propriety of the AIA challenges that led to the PTAB invalidation of the above noted asserted claims. In its cert petition, WesternGeco complained about the “incoherent” Federal Circuit precedent for interpreting the § 315 1 year time-bar blocking challenges by a “petitioner, real party in interest, or privy of the petitioner” that has been sued for infringing the patent. Supreme Court Case No. 18-861.

Paul St. Marie, Jr., an intellectual property law clerk in the Washington, DC office, also contributed to this article.

Licensor’s Non-Material Breach Doesn’t Excuse Royalties Non-Payment

The US Court of Appeals for the Eighth Circuit affirmed denial of a licensee’s motion for a new trial, finding that there was no error in awarding damages to the plaintiff/licensor for the licensee’s failure to pay royalties under a patent license agreement, despite the district court’s finding that the licensor also breached the agreement. Ryan Data Exchange, Ltd. v. Graco, Inc., Case No. 17-1451 (8th Cir. Jan. 10, 2019) (Beam, J).

In 2005, Rydex sued Graco for patent infringement, and the parties settled. Rydex granted Graco an exclusive license to use the patent in return for royalties of 5 percent of the net selling price of the products using the patent. The agreement contained a provision under which Rydex would have the initial choice and obligation to prosecute any third-party infringers.

In 2011, Rydex sued three parties, Badger Meter, Balcrank Corp. and Lincoln Industrial Corp. (collectively, Badger), for patent infringement. In that case, the evidence revealed that Rydex and Graco knew that Badger was allegedly infringing the patent at the time they entered into the exclusive license agreement in 2005. Rydex and Badger settled in 2012.

In 2013, Graco stopped paying royalties and asserted that Rydex had breached the license agreement’s exclusivity provision by allowing Badger to continue its infringement and failing to prosecute the infringement claim. Rydex, in turn, sued Graco for breach of contract and patent infringement. Graco countersued, also alleging breach of contract, and sought declaratory judgments that the patent was invalid and that Rydex had lost its right to receive royalty payments.

At trial, the district court ruled as a matter of law, pursuant to Rule 50(a), that Rydex had breached its duty to prosecute infringements of the licensed patent and that Rydex was in breach of the exclusivity provision of the license agreement from the date of the dismissal of the Badger litigation in 2012. The district court noted that the record was clear that over a period of several years before the Badger litigation, both parties operated under the license agreement with the understanding that there was some threat to either the validity of the patent or the existence of potential infringing third parties.

The issues were presented to a jury, which found that Graco breached the license agreement by failing to pay royalties to Rydex from 2013 through the date the patent expired, and awarded Rydex $313,000 in damages. The jury awarded Graco $0 for Rydex’s breaches already determined by the court as a matter of law. Graco asked the district court to renew its judgment as a matter of law and rule that Rydex was not entitled to damages. The district court declined, however, noting that “although it had determined as a matter of law that Rydex breached the Agreement, it had not made any determination as to materiality,” and the jury determined that Rydex had not materially breached the agreement. Both parties appealed.

The Eighth Circuit agreed with the district court that the record established that the parties operated under a license agreement with the knowledge and understanding that there was some threat to the validity of the patent and the existence of potential infringers for several years. However, under Iowa law, only a material breach could excuse Graco’s non-performance. The issues were presented to the jury, which determined that the breach was not material. Finding no error, the Eighth Circuit affirmed.

ANDA Applicant Has Standing to Appeal IPR Decision, Even with Only Paragraph III Certification

The US Court of Appeals for the Federal Circuit found that a failed inter partes review (IPR) petitioner that maintained a Paragraph III certification had sufficient standing to appeal an adverse decision, but affirmed the Patent Trial and Appeal Board (PTAB) finding of non-obviousness on the merits. Amerigen Pharmaceuticals Ltd. v. UCB Pharma GmbH, Case No. 17-2596 (Fed. Cir. Jan. 11, 2019) (Lourie, J) (Chen, Stoll, JJ, concurring).

UCB owns an Orange-Book-listed patent covering certain chemical derivatives of 3,3- diphenylpropylamines, including a compound called fesoterodine. Fesoterodine is an antimuscarinic drug marketed by UCB as Toviaz® to treat urinary incontinence. Amerigen filed an IPR petition challenging the validity of UCB’s patent. The PTAB ultimately found that UCB’s patent was not obvious in view of the cited prior art. Amerigen appealed.

UCB moved to dismiss the appeal for lack of standing. Amerigen had previously lost a Hatch-Waxman litigation in district court and was required to change its US Food and Drug Administration (FDA) filing into a Paragraph III certification, thereby preventing final FDA approval of its product until after the expiration of UCB’s patent. UCB argued that since the FDA could not approve Amerigen’s abbreviated new drug application (ANDA) until the expiration of the challenged patent, there was no potential for infringement leading to a justiciable dispute. In response, Amerigen argued that its ANDA product had already secured tentative approval from the FDA, and that invalidating the claims of UCB’s patent would advance the launch of its product.

The Federal Circuit agreed with Amerigen, finding that this case did not arise under the Hatch-Waxman Act and that Amerigen did not rely on a risk of infringement liability as a basis for injury. Instead, the Court found that the mere listing of UCB’s patent in the Orange Book inflicted a concrete commercial injury that was redressable by the Court. Turning to the non-obviousness finding, the Court affirmed the PTAB’s finding that Amerigen did not satisfy its burden of showing that the challenged claims of UCB’s patent were obvious in view of the substantial evidence relied upon by the PTAB.

Practice Note: Based on this decision, it appears that ANDA filers that choose to file an IPR petition have multiple opportunities to invalidate an Orange Book patent even if they end up losing in the district court litigation. This strategy of filing an IPR may be even more compelling when the primary basis for generic challenge is invalidity rather than non-infringement.

Not So Fast! Order Limiting Damages Does Not Create Appealable Final Judgment

In considering an appeal in a patent and breach of contract case, the US Court of Appeals for the Federal Circuit explained that a district court’s damages ruling was not dispositive where it did not foreclose the plaintiff’s ability to prove the required elements of the cause of action. Princeton Digital Image Corp. v. Office Depot Inc., Case Nos. 17-2597, -2598, -2600, -2602, -2605, -2606, -2609, -2611, -2612, -2627, -2628, -2629, -2630, -2631, -2632, -2633, -2634, 18-1006 (Fed. Cir. Jan. 22, 2019) (Dyk, J). Since there was no final judgement, the Federal Circuit found that the district court’s decision was not appealable and thus there was no appellate jurisdiction.

Princeton Digital Image Corporation (PDIC) licensed a patent that covered encoding image data and digital images to Adobe. PDIC later initiated litigation against several Adobe customers alleging that the customers were encoding images on their websites that infringed on its patent. Adobe intervened on behalf of the defendants, filed a breach of contract claim against PDIC, and sought damages, attorneys’ fees and sanctions.

The district court declined to award attorneys’ fees or sanctions, reasoning that although the case stood out from others, PDIC’s conduct was not “so exceptional” as to merit an award of fees. Nor could the district court say that PDIC’s pre-suit investigation was inadequate or made for an improper purpose to justify a sanctions award. As to damages, the district court ruled that Adobe could collect damages only for “defensive fees” that it expended in defending its customers from PDIC’s infringement suit. The district court twice struck Adobe’s claimed damages, finding that they did not disclose a purely defensive number. Although the district court entered judgment in PDIC’s favor at Adobe’s request, the court reiterated its position that there were purely defensive fees that could be proven in the record. Adobe appealed.

Adobe contended that the Federal Circuit had jurisdiction because Adobe was appealing a “final decision of a district court.” The Federal Circuit disagreed, finding that a district court decision is not a final decision where it does not resolve the issue of infringement. The Federal Circuit followed a long line of precedent from both before and after the Supreme Court’s 2017 ruling in Microsoft v. Baker finding that the district court did not foreclose Adobe’s ability to prove the required elements of its claim. To the contrary, the district court merely restricted the damages Adobe could pursue and repeatedly emphasized its willingness to consider a damages award regarding purely defensive damages. Although Adobe faced the prospect of a smaller damages award, it could have proceeded to trial on its claims and was obligated to do so to receive a final judgment on the merits. As the Federal Circuit explained, the fact that continuing litigation may be economically imprudent does not create a final decision that can be appealed.

The Federal Circuit also found that it lacked jurisdiction over Adobe’s appeal and PDIC’s cross-appeal because the district court’s ruling constituted an interim order denying fees and sanctions because it preceded final judgment on the merits. No exceptional circumstances justified treating the denial of fees as an order collateral to the merits.

Post-SAS: PTAB Is Obligated to Hear Non-Instituted Grounds

Addressing whether the Patent Trial and Appeal Board (PTAB) exceeded its authority and deprived the patent owner of due process by belatedly considering a non-instituted ground in an inter partes review (IPR) proceeding, the US Court of Appeals for the Federal Circuit found that the PTAB was required to consider all grounds raised in the petition, and it would be error to consider anything less. AC Techs. S.A. v. Amazon.com, Inc., Case No. 18-1433 (Fed. Cir. Jan. 9, 2019) (Stoll, J). The Court explained that Supreme Court of the United States precedent “mandates” that the PTAB consider all grounds raised in an instituted petition.

AC Techs owns a patent directed to data access and management, where “computer units” store data in, or request data stored in, clusters composed of one or more cells, via a network. Amazon filed a petition for IPR challenging claims of the patent on three grounds, which all used the same prior art reference. On ground 1, if the claimed “computer unit” were construed narrowly, and if the prior art’s disclosure of a “client” were mapped to the “computer unit,” the prior art reference would render all of the challenged claims obvious. In the alternative, if “computer unit” were construed broadly, and if the prior art’s “host” were mapped to the “computer unit,” the reference would anticipate some claims (ground 2) and render obvious the remaining claims (ground 3).

The PTAB instituted IPR proceedings on grounds 1 and 2, and stated that under its construction, ground 3 was “moot.” In its final decision, the PTAB mapped the prior art’s “host” to the claimed “computer unit” and found that the claims challenged in ground 2 were anticipated. If, on the other hand, the prior art’s “client” were mapped to the claimed “computer unit,” as was presented in ground 1, the PTAB found that the prior art did not render the remaining claims obvious. Amazon sought reconsideration for the PTAB to reach ground 3. The PTAB allowed the parties to submit additional arguments, expert declaration and supporting exhibits with respect to ground 3. Without holding a hearing on ground 3, the PTAB granted Amazon’s motion for reconsideration, finding the remaining claims obvious on ground 3. AC Techs appealed.

On appeal, the Federal Circuit determined that the PTAB had not exceeded its authority when it agreed to hear the previously non-instituted ground, finding that “it would have violated the statutory scheme had the Board not done so.” The Federal Circuit explained that the PTAB provided due process for ground 3 because the parties had adequate notice of the issues the PTAB decided and the parties had an opportunity to be heard on all those issues. The Court noted that even though the PTAB did not hold a hearing for ground 3, the parties never requested one. After finding that the PTAB did not exceed its authority to reach ground 3, the Federal Circuit affirmed the PTAB’s claim construction and its obviousness and anticipation determinations.

Trademark Owner’s Fate Sealed Tight After Finding of Fraud on PTO

Addressing the issue of collateral estoppel, the US Court of Appeals for the Eighth Circuit upheld a ruling dismissing a trademark owner’s second infringement lawsuit against the same defendant after a finding that the trademark at issue was no longer incontestable because of fraud on the US Patent and Trademark Office (PTO). B&B Hardware, Inc. v. Hargis Indus., Inc., Case Nos. 17-1570, -1755 (8th Cir. 2018) (Shepard, J).

B&B Hardware and Hargis Industries manufacture and sell fasteners for the aerospace industry and the construction trade, respectively. In 1993, B&B registered the mark SEALTIGHT for its fasteners. Hargis subsequently applied to register SEALTITE, beginning an almost 20-year dispute between the companies.

B&B filed its first trademark infringement suit against Hargis in 2000. The jury in that case found that the SEALTIGHT mark lacked secondary meaning and therefore was not protectable. The Eighth Circuit affirmed. In 2006, B&B filed a declaration of incontestability for the SEALTIGHT mark. In the declaration, B&B averred that there was no final decision adverse to B&B’s right to own or register the SEALTIGHT mark, and never disclosed the 2000 jury verdict. The PTO accepted the declaration, resulting in a presumption that the SEALTIGHT registration was valid and the mark had secondary meaning.

B&B filed another trademark infringement action against Hargis shortly thereafter. The district court dismissed this action based on collateral estoppel (issue preclusion). The Eighth Circuit reversed and remanded, holding that the incontestable status of the SEALTIGHT mark was a “significant factual change” preventing application of the doctrine of collateral estoppel. After losing another trial and appeal, B&B filed an appeal to the Supreme Court of the United States, resulting in an eventual remand to the district court.

On remand, a jury found that Hargis had committed trademark infringement but awarded B&B no damages. The jury also found that the incontestability status of the SEALTIGHT mark had been obtained by fraud based on the failure to disclose the 2000 jury verdict. Based on the fraud verdict, the district court ruled that B&B committed fraud on the PTO, and that the SEALTIGHT mark was no longer entitled to incontestable status. As a result, the district court dismissed the case, concluding that B&B’s claims were barred by collateral estoppel. B&B appealed.

B&B challenged the jury’s fraud verdict on two grounds. First, B&B argued that the 2000 jury verdict was not a final adverse decision. However, the Eighth Circuit noted that during a 2007 proceeding denying registration of Hargis’ SEALTITE mark, the TTAB clearly stated that the 2000 jury verdict was an adverse decision. B&B further argued that it was not aware that the 2000 jury verdict was an adverse decision, and that no fraud occurred because it relied on advice of counsel when it decided not to disclose the 2000 jury verdict. B&B’s owner testified as to the reliance on advice of counsel, and the jury was free to determine his credibility. The Eighth Circuit found no error in the district court’s findings that B&B acted willfully in failing to disclose the 2000 jury verdict and that B&B committed fraud on the PTO.

The Eighth Circuit then addressed the district court’s application of collateral estoppel to the issue of secondary meaning. At the outset, the Court noted that it was the incontestability status of the SEALTIGHT mark that allowed B&B to maintain the second action against Hargis and avoid the preclusive effect of the 2000 jury verdict. B&B alleged no other significant factual changes since the 2000 action. Without incontestable status, B&B returned to the position it was in at the 2000 jury trial—having to prove secondary meaning for the SEALTIGHT mark. However, B&B and Hargis had already litigated the issue of secondary meaning, an essential element in the case, and the 2000 jury verdict was a valid and final judgment. Having satisfied all of the elements of collateral estoppel, the Eighth Circuit affirmed the district court’s application of the doctrine and the dismissal of B&B’s claims.

TTAB Must Consider All Relevant DuPont Factors

Reviewing a decision from the Trademark Trial and Appeal Board (TTAB), the US Court of Appeals for the Federal Circuit vacated and remanded the TTAB’s affirmation of an examining attorney’s refusal to register the trademark GUILD MORTGAGE COMPANY and design on grounds of likelihood of confusion with a prior registration, finding that the TTAB did not properly consider all relevant DuPont factors when confirming the registration refusal. In re: Guild Mortgage Company, Case No. 2017-2620 (Fed. Cir. Jan. 14, 2019) (Moore, J).

Having used its eponymous trademark since 1960, Guild Mortgage Co. filed a US trademark application in 2015 to federally register the GUILD MORTGAGE COMPANY and design mark in relation to its mortgage banking services. The examining attorney refused registration of the mark based on likelihood of confusion with a prior registration for the mark GUILD INVESTMENT MANAGEMENT covering investment advisory services.

Registration of a trademark may be refused if there is a likelihood of consumer confusion with an earlier-filed US trademark application or registration. Whether a likelihood of confusion exists between two trademarks is determined using the factors set out in the venerable 1973 In re E.I. DuPont DeNemours & Co. decision issued by the CCPA, the predecessor court to the Federal Circuit. There are 13 DuPont factors that compare various commercial elements, such as the similarity of the parties’ respective trademarks, goods and services, and trade channels, and the sophistication of relevant consumers.

In the case of Guild Mortgage, the TTAB agreed with the examining attorney’s refusal to register, finding that the GUILD MORTGAGE COMPANY and design trademark was likely to cause consumer confusion with the prior registration for GUILD INVESTMENT MANAGEMENT, based on the examining attorney’s conclusion that the marks, the nature of the services, and the parties’ respective trade channels were similar. The TTAB concluded that, on balance, those factors outweighed the TTAB’s opposite finding on the factor that consumers “may exercise a certain degree of care in investing money, if not perhaps in seeking a mortgage loan.” Guild Mortgage appealed.

The Federal Circuit found that the TTAB did not properly address DuPont factor 8, which examines the “length of time during and conditions under which there has been concurrent use without evidence of actual confusion.” The Court noted that Guild Mortgage had argued before the examining attorney and the TTAB that it and Guild Investment Management have coexisted in business for more than 40 years without any evidence of actual confusion. The company submitted a declaration by its president and CEO confirming those facts. Given more than 40 years of concurrent use of both trademarks, Guild Mortgage argued that “there is no possibility of confusion in the minds of consumers between [both marks].”

The Federal Circuit noted that the TTAB’s opinion provided no indication that it considered DuPont factor 8, and found that the TTAB erred in failing to consider Guild Mortgage’s arguments and evidence. The Court further found that the TTAB’s error was not harmless, because the mortgage company’s evidence weighed in favor of no likelihood of confusion between the two GUILD trademarks. The Court made no determination as to the weight with which the mortgage company’s evidence should be accorded, just that it was error not to consider it at all, and remanded the case to the TTAB to reconsider its likelihood of confusion determination in light of all available evidence.

Fifth Circuit Schools Plaintiff on Likelihood of Confusion

Addressing whether the name of a public school district’s summer reading program infringed upon an education services company’s trademarks related to a literacy incentive program, the US Court of Appeals for the Fifth Circuit affirmed—on the alternative grounds of no likelihood of confusion—a summary judgment for the defendant. Springboards to Education, Inc. v. Houston Independent School District, Case No. 18-20119 (5th Cir. Jan. 29, 2019) (King, J).

In 2005, Springboards to Education launched a literacy incentive program for students called the Read a Million Words campaign. Students who reached their reading goals could receive the Millionaire Reader award, earn membership in the Millionaire’s Reading Club, and receive rewards such as t-shirts, backpacks and fake money. Springboards later secured federal registration for these trademarks and service marks.

In 2008, Houston Independent School District (HISD) launched a reading program called Houston ISD Millionaire Club to encourage students to read during the summer. Like Springboards’ program, participating students received rewards such as t-shirts, backpacks and fake money. HISD officials testified that they did not know about Springboards’ program when they came up with the name for their summer reading program.

Springboards sued HISD for trademark infringement, counterfeiting, false designation of origin and dilution. After HISD and Springboards filed cross-motions for summary judgment, the district court granted HISD’s motion on the ground that Springboards could not show that HISD had used the mark in commerce. Springboards appealed.

The Fifth Circuit expressed no opinion about the district court’s ruling and instead affirmed the decision on the alternative ground that no reasonable juror could find that HISD’s use of “Houston ISD Millionaire Club” caused a likelihood of confusion with Springboards’ program.

In reaching its decision, the Fifth Circuit first identified who was likely to be confused and when that likelihood of confusion would arise. Given the circumstances of how the parties offered their services, the Court reasoned that the only potential actionable likelihood of confusion would be post-sale confusion among third-party educators. Specifically, if third-party educators used HISD’s services and found them inferior, customers might be less likely to purchase Springboards’ services because of a mistaken association with HISD.

Having placed its analysis in context, the Fifth Circuit assessed the likelihood of confusion factors as follows:

1. Strength of Springboards’ Marks: The Court found that this factor weighed against a likelihood of confusion. Springboards’ marks were at best suggestive, and there was no evidence that its marks were widely recognizable (particularly in light of the many third-party reading programs using the word “millionaire”).
2. Similarity of the Marks: The Court found that this factor favored neither party. While the parties’ marks had commonalities, the Court noted that the addition of “Houston ISD” to HISD’s mark mitigated any likelihood of confusion.
3. Similarity of the Services: The Court found that this factor weighed in favor of a likelihood of confusion, because both parties offered incentive-based reading programs.
4. Identity of Retail Outlets/Purchasers: The Court found that this factor modestly weighed in favor of a likelihood of confusion. HISD is a school district, and Springboards sells its reading program to school districts. Thus, someone could see HISD’s program and believe that HISD had purchased it from Springboards.
5. Identity of Advertising Media: The Court found that this factor weighed not particularly relevant to the analysis as HISD did not market the Houston ISD Millionaire Clib. Noting the “awkward fit” of this factor with the circumstances of the case, the Court concluded that a third-party educator who might  have seen HISD using its own reading program would not have “erroneously believed” that HISD was marketing to outside school districts, especially as Springboards’ explicitly targets school districtds in  its marketing.
6. Intent to Confuse: The Court found that this factor weighed against a likelihood of confusion. There was no direct evidence of intent to confuse, and undisputed evidence showed that HISD had chosen the name of its program without knowledge of Springboards’ marks.
7. Actual Confusion: The Court found that this factor weighed minimally in favor of a likelihood of confusion in light of a declaration submitted by an educator stating that he thought the Houston ISD Millionaire Club was affiliated with Springboards.
8. Degree of Care Exercised by Purchasers: The Court found that this weighed against a finding of a likelihood of confusion because public school districts, not individual consumers, are the purchasers of Springboards products and thus would exercise greater care in their purchasing decisions.

Finding that because the “great weight” of the factors indicated there was no likelihood of confusion, the Fifth Circuit affirmed summary judgment for HISD on Springboards’ claims for trademark infringement, trademark counterfeiting and false designation of origin. The Court also affirmed summary judgment for HISD on Springboards’ trademark dilution claim because there was no evidence that Springboards’ marks were widely recognized by the general consuming public.

Although Dismissal Sanction Was Abuse, Complaint Fails on Nominative Fair Use

Addressing whether a district court properly dismissed a Lanham Act case as a sanction for failure to timely file an amended complaint, the US Court of Appeals for the Ninth Circuit concluded that the dismissal sanction was an abuse of discretion but nevertheless affirmed the dismissal on the alternative ground that the plaintiff failed to state a claim because the allegations of defendants’ use of the mark constituted nominative fair use. Applied Underwriters, Inc. v. Lichtenegger, Case No. 17-16815 (9th Cir. Jan. 15, 2019) (Smith, J).

Applied Underwriters owns the marks APPLIED UNDERWRITERS and EQUITYCOMP plus several stylized versions of those marks. According to Applied Underwriters, in November 2015, the defendants began offering a seminar (online and on DVD) that used Applied Underwriters’ marks in the title of the webcast.

Applied Underwriters brought claims for trademark infringement and dilution, false designation of origin, and federal and state unfair competition. The defendants moved to dismiss all of the claims under Rule 12(b)(6) on several grounds, including nominative fair use.

The district court agreed, finding that the defendants’ use of the marks constituted nominative fair use. At Applied Underwriters’ request, the district court granted leave to amend the complaint within 30 days, but Applied Underwriters neither filed an amended complaint nor advised the district court that it would not do so. After the deadline passed, the district court entered an order dismissing the case: “In light of Plaintiff’s failure to file an Amended Complaint pursuant to the Court’s Order (ECF No. [31]), this case is hereby DISMISSED. CASE CLOSED.” The clerk entered judgment accordingly. Applied Underwriters appealed.

On appeal, the parties disputed whether the district court’s dismissal had been under Rule 12(b)(6)—in which case the appellate court would conduct a de novo review—or under Rule 41(b) as a sanction—in which case the appellate court would review for an abuse of discretion. The Ninth Circuit first remanded the case for the limited purpose of allowing the district court to clarify why it had dismissed the complaint. The district court entered a clarification order stating that it had dismissed the complaint under Rule 41(b) as a sanction for failing to comply with the district court’s order.

The Ninth Circuit found that the district court abused its discretion by dismissing the complaint as a sanction under Rule 41(b). The Court acknowledged its precedent holding that a district court may dismiss an action under Rule 41(b) where a plaintiff fails to file an amended complaint or to advise the district court of its intent not to do so after being granted leave. But the Court clarified that the sanction is only appropriate where the district court required the plaintiff to file an amended complaint or some other document evidencing its decision not to file an amended complaint. Otherwise, the party cannot have failed to comply with a “court order.” As the panel explained, because the district court’s order granting leave to amend had been permissive, the district court could not dismiss the action under Rule 41(b) for failing to file an amended complaint timely.

The Ninth Circuit then went on to rule on the alternative ground that the complaint failed to state a claim on Rule 12(b)(6), assuming that should the Court remand for the district court’s reconsideration, it would again dismiss the complaint on the ground of nominative fair use. Specifically, the Court held that the defendants’ seminar exclusively critiqued Applied Underwriters’ EquityComp^® program; that the defendants’ seminar did not use Applied Underwriters’ stylized marks, only plain text of its name; and that the plaintiff’s claim of a likelihood of confusion in light of the defendants’ more prominent, stylized use of their own mark was implausible.

Practice Note: A plaintiff seeking to appeal an adverse order on a motion to dismiss, even where leave to amend the complaint in a specific time period had been granted, need not wait for the amendment period to lapse before seeking entry of judgment and an appeal. However, failing to advise the district court of a decision not to amend creates a risk of loss of de novo review—especially if the district court used mandatory amendment language.